Stitch Fix Launches New Styling Algorithm Amid Focus On Data Science

Amid a focus on data science to meet customers’ tastes, online personal styling service Stitch Fix. Inc. beat analysts’ revenue and earnings estimates for the second quarter of its fiscal year 2019. The company net revenue of $370.3 million and earnings per share of 12 cents compared to analysts’ estimates of $364.9 million and 5 cents.

Stitch Fix President and COO Mike Smith said one of the company’s key strengths is its ability to use data science to match its inventory to millions of customers with their own preferences. And the company is looking to make its match-making capability better as it keeps growing, “which we believe is a competitive advantage and fundamental to driving compelling client experiences,” Smith said. In the second quarter, the company rolled out a new inventory optimization algorithm to more effectively allocate inventory to its client base.

Smith said the company historically optimized inventory allocation one client at a time based on which customer was first in the queue. The new algorithm, however, takes into account the preferences of a larger universe of customers to see what kinds of inventory stylists should access as they style for each customer, Smith explained. As a result, the stylists can have the right inventory to meet the tastes of customers — regardless of the customer’s position in the queue.

Smith said early results suggest increases in client satisfaction, the number of items purchased per fix and the average order value. “We believe this algorithm will enable us to more effectively serve our growing client base over time, while also driving efficiencies across styling, inventory management and operation,” Smith said. And, in an update to the company’s efforts in the U.K., Smith noted that the company established a local presence by bringing onboard a U.K. team. He also said the company has garnered strong interest from local brands to work “to create a compelling assortment for U.K men and women.” The company also is looking to use its data science abilities to meet the tastes of U.K. clients.

The company announced its plan to expand its personal shopping service into the United Kingdom last year. It reported at the time that shoppers could sign up online to be on the company’s wait list even though they would have to wait until the end of its fiscal year 2019 to take advantage of the site. Stitch Fix Founder and CEO Katrina Lake said, according to reports, “We believe our ability to create a uniquely personalized shopping experience is something that will resonate with consumers and brands outside of the United States.” Lake added at the time, “We can’t wait to show our first U.K. clients how effortless, convenient and fun Stitch Fix is.”

The Road Ahead

In the call, Lake said the heart and soul of the company are the real and intimate connections it makes with its clients. And she said the company’s success is due to those relationships. Lake noted that the company’s primary focus is on bolstering those relationships, driving higher engagements and ultimately translating that into more valuable customers. In practice, Lake said, decisions to drive value to Stitch Fix customers are based on an interplay between fix delivery, assortment and marketing mix. Different customers, for instance, might find different fix dates they can access. These dates are an example of the company’s efforts to match its selection of items with the preferences of customers. Lake said the company can use wait times as a lever to increase the success of a particular fix and enhance value for customers over time.

Lake said another lever the company has available is marketing. The company would in the past market more or less aggressively to particular groups (such as men) based on the availability of inventory. To put that framework into context, Lake said the company had higher-than-expected demand from existing customers in the second quarter. And, as a result of increased consumer demand, repeat customers consumed more of its inventory during the quarter. To make sure it had the right inventory to serve new customers as well, the company shifted some of its marketing dollars from the quarter to the back half of the year.

The company also launched its first integrated brand marketing campaign soon after the close of the second quarter. Lake said one of the most important goals of the campaign is to increase understanding of the brand, as “even when there is an awareness of Stitch Fix, there isn’t always an understanding of the full breadth of our offerings.” By increasing brand understanding, Lake said the company could help improve conversion as clients are shown messaging that the company thinks will benefit all of its marketing channels.

The central message of the campaign is “everyone deserves to be seen,” and Lake said the timing, as well as the theme, was deliberate and grounded on customer insight. Stitch Fix chose to launch the campaign by anchoring to a cultural moment such the Oscars. That link allows it to gain the rewards of the impressions associated with the event before, during and after it takes place, “greatly amplifying the value of our investment,” Lake said.